Buying out a fellow shareholder

Q: What are the two routes?

In a purchase by the remaining shareholders, the leaver sells to one or more of the others, who pay from their own money. The shares continue to exist and simply change hands. In a company buyback, the company pays the leaver and the shares are cancelled (or, in some cases, held in treasury). The remaining shareholders' percentages rise because the share capital shrinks, not because they bought anything. PointPurchase by shareholdersCompany buyback Who paysThe buying shareholders personallyThe company Funding limitsNone in company lawDistributable profits or a fresh issue, section 692(2), or capital under Chapter 5 of Part 18 Resulting shareholdingsWhatever split the buyers agreeRemaining holders increase in proportion to their existing shares Members' approvalOnly if the articles require itResolution approving the contract before purchase, section 694 Main filingStock transfer form to HMRC if stamp duty is dueSH03 return and notice of cancellation within 28 days Seller's taxCapital gains taxIncome tax on a distribution unless section 1033 applies

Q: How does a purchase by the other shareholders work?

Check the articles. Many articles require shares to be offered to all other shareholders pro rata before a transfer, and the model articles let directors refuse to register a transfer under article 26(5). Everyone with a pre emption right should sign a waiver if the shares are not being split pro rata. Agree the price and sign a sale agreement. For anything beyond a small sum, a short share purchase agreement records price, timing and any warranties. Complete a stock transfer form. HMRC's guidance says the form must give the shares transferred, the buyer and seller and the consideration in sterling. Pay stamp duty. The rate is 0.5% of the consideration under paragraph 3 of Schedule 13 to the Finance Act 1999, rounded up to the nearest £5. HMRC says the form must be sent and the duty paid within 30 days of the form being signed and dated. If the consideration is £1,000 or less and the transfer is not part of a larger transaction above £1,000, certificate 1 on the form is completed instead and no duty is usually payable. The process is in how to get a stock transfer form stamped. Register the transfer. Under section 771, once a transfer is lodged the company must register it or give notice of refusal with reasons as soon as practicable and in any event within two months. Under article 26(4) of the model articles, the seller remains the holder until the buyer is entered in the register. The wider transfer rules are covered in transferring shares in a private company.

Q: What does each route look like in numbers?

Illustration only. Ann, Ben and Cara each own 100 of the company's 300 £1 ordinary shares. Cara is leaving and the agreed price is £150,000. Shareholder purchase. Ann and Ben each buy 50 shares for £75,000. Each stock transfer form carries stamp duty of 0.5% × £75,000 = £375. Ann and Ben end up with 150 shares each, 50% apiece, and have funded £150,000 between them from their own resources. Company buyback. The company needs at least £150,000 of distributable profits and must pay the full price on completion. Cara's 100 shares are cancelled, leaving Ann and Ben with 100 of 200 shares, again 50% each. Stamp duty on the SH03 is 0.5% × £150,000 = £750. Cara's interest falls to nil, so the substantial reduction test is met, and if she has held the shares for five years and the trade benefit test is satisfied, she is taxed on a capital gain. The ownership result is the same, but the cash comes from different pockets. If the company cannot pay the whole price at once, section 691(2) is a hard limit; see buyback paid in instalments for the options.

Q: What mistakes come up most often?

Paying before the resolution. An off market buyback without prior member approval of the contract breaches section 694. Leaving the price on loan account. Section 691(2) requires payment on purchase. HMRC's Company Taxation Manual at CTM17505 says a loan account does not count as payment, so the shares are not cancelled and legal ownership stays with the seller. Not checking reserves. The distributable profits test is applied to the company's accounts; a buyback larger than the reserves fails under section 692. Letting the seller vote. Section 695 excludes the seller's votes on the shares being bought. Overlooking pre emption on transfer. A sale to one shareholder can breach a pro rata offer requirement in the articles unless the others waive it. Missing the five year holding period. A buyback of shares held for less than five years generally fails section 1035, so the payment is taxed as income. Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant's fees with Solar Protect. Read how our cover works or get a quote.

When one owner of a private company wants to leave, the remaining shareholders can buy the shares personally, or the company can buy them back and cancel them. A personal purchase needs a stock transfer form, stamp duty and an update to the register, and the seller is normally taxed on a capital gain. A company buyback needs distributable profits, a members’ resolution approving the contract in advance, full payment on completion and filings at Companies House, and the seller is taxed on income unless the capital treatment conditions in section 1033 of the Corporation Tax Act 2010 are met.

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What are the two routes?

In a purchase by the remaining shareholders, the leaver sells to one or more of the others, who pay from their own money. The shares continue to exist and simply change hands. In a company buyback, the company pays the leaver and the shares are cancelled (or, in some cases, held in treasury). The remaining shareholders’ percentages rise because the share capital shrinks, not because they bought anything.

Point	Purchase by shareholders	Company buyback
Who pays	The buying shareholders personally	The company
Funding limits	None in company law	Distributable profits or a fresh issue, section 692(2), or capital under Chapter 5 of Part 18
Resulting shareholdings	Whatever split the buyers agree	Remaining holders increase in proportion to their existing shares
Members’ approval	Only if the articles require it	Resolution approving the contract before purchase, section 694
Main filing	Stock transfer form to HMRC if stamp duty is due	SH03 return and notice of cancellation within 28 days
Seller’s tax	Capital gains tax	Income tax on a distribution unless section 1033 applies

How does a purchase by the other shareholders work?

Check the articles. Many articles require shares to be offered to all other shareholders pro rata before a transfer, and the model articles let directors refuse to register a transfer under article 26(5). Everyone with a pre emption right should sign a waiver if the shares are not being split pro rata.
Agree the price and sign a sale agreement. For anything beyond a small sum, a short share purchase agreement records price, timing and any warranties.
Complete a stock transfer form. HMRC’s guidance says the form must give the shares transferred, the buyer and seller and the consideration in sterling.
Pay stamp duty. The rate is 0.5% of the consideration under paragraph 3 of Schedule 13 to the Finance Act 1999, rounded up to the nearest £5. HMRC says the form must be sent and the duty paid within 30 days of the form being signed and dated. If the consideration is £1,000 or less and the transfer is not part of a larger transaction above £1,000, certificate 1 on the form is completed instead and no duty is usually payable. The process is in how to get a stock transfer form stamped.
Register the transfer. Under section 771, once a transfer is lodged the company must register it or give notice of refusal with reasons as soon as practicable and in any event within two months. Under article 26(4) of the model articles, the seller remains the holder until the buyer is entered in the register.

The wider transfer rules are covered in transferring shares in a private company.

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How does a company buyback work?

Part 18 of the Companies Act 2006 sets a strict sequence. The main requirements for a private company are:

the articles must not restrict or prohibit the purchase, section 690(1);
the shares must be fully paid, section 691(1), and must be paid for on purchase, section 691(2), so the price cannot be left outstanding;
the price must come from distributable profits or the proceeds of a fresh issue made for the purpose, section 692(2), unless the company uses the payment out of capital procedure or the small buyback allowance in section 692(1ZA);
the contract must be approved by a resolution of the members before it is entered into, or be conditional on that approval, section 694(2). The Act does not specify the type, so an ordinary resolution suffices unless the articles require more, section 281(3);
the seller cannot vote the shares being bought: on a written resolution they are not an eligible member, and at a meeting the resolution fails if it would not have passed without their votes, section 695;
the contract or a memorandum of its terms must be sent with a written resolution, or be available at the registered office for 15 days before the meeting and at the meeting, section 696. Otherwise the resolution is not validly passed.

After completion, the company must deliver form SH03 within 28 days of the shares being delivered to it, section 707, and a notice of cancellation with a statement of capital within the same 28 days, section 708. Section 66 of the Finance Act 1986 charges the SH03 to stamp duty as if it were a transfer to the company, and HMRC’s manual at STSM021260 says the duty must be paid and the SH03 stamped before it goes to Companies House. The company must keep the contract available for inspection for ten years under section 702. More detail is in company purchase of own shares and stamp duty on share buybacks.

How is the leaving shareholder taxed?

On a sale to the other shareholders, the leaver makes a capital gain. If they qualify for Business Asset Disposal Relief, gov.uk confirms the rate is 18% on qualifying gains on disposals from 6 April 2026. For shares, the conditions include holding at least 5% of the shares and voting rights, being an employee or officer and the company being a trading company, all for at least two years before the sale.

On a buyback, the starting point is that the payment above the capital originally subscribed is a distribution taxed like a dividend. Section 1033 of the Corporation Tax Act 2010 removes it from distribution treatment, so the whole receipt is taxed as a capital gain, where the company is an unquoted trading company (or holding company of a trading group) and Condition A is met. Condition A requires:

the purchase to be made wholly or mainly to benefit the trade, and not as part of a scheme to avoid tax or extract profits without a dividend;
the seller to be UK resident in the tax year of the purchase, section 1034;
the shares to have been owned throughout the five years ending with the purchase, section 1035;
the seller’s interest to be substantially reduced, meaning their interest afterwards is not more than 75% of their interest before, section 1037;
the seller not to be connected with the company afterwards, section 1042, which section 1062 tests by reference to holding or being entitled to more than 30% of the share capital, voting power or loan and share capital.

The company can apply to HMRC for advance clearance under section 1044. See share buyback tax treatment for the calculation.

What does each route look like in numbers?

Illustration only. Ann, Ben and Cara each own 100 of the company’s 300 £1 ordinary shares. Cara is leaving and the agreed price is £150,000.

Shareholder purchase. Ann and Ben each buy 50 shares for £75,000. Each stock transfer form carries stamp duty of 0.5% × £75,000 = £375. Ann and Ben end up with 150 shares each, 50% apiece, and have funded £150,000 between them from their own resources.
Company buyback. The company needs at least £150,000 of distributable profits and must pay the full price on completion. Cara’s 100 shares are cancelled, leaving Ann and Ben with 100 of 200 shares, again 50% each. Stamp duty on the SH03 is 0.5% × £150,000 = £750. Cara’s interest falls to nil, so the substantial reduction test is met, and if she has held the shares for five years and the trade benefit test is satisfied, she is taxed on a capital gain.

The ownership result is the same, but the cash comes from different pockets. If the company cannot pay the whole price at once, section 691(2) is a hard limit; see buyback paid in instalments for the options.

What mistakes come up most often?

Paying before the resolution. An off market buyback without prior member approval of the contract breaches section 694.
Leaving the price on loan account. Section 691(2) requires payment on purchase. HMRC’s Company Taxation Manual at CTM17505 says a loan account does not count as payment, so the shares are not cancelled and legal ownership stays with the seller.
Not checking reserves. The distributable profits test is applied to the company’s accounts; a buyback larger than the reserves fails under section 692.
Letting the seller vote. Section 695 excludes the seller’s votes on the shares being bought.
Overlooking pre emption on transfer. A sale to one shareholder can breach a pro rata offer requirement in the articles unless the others waive it.
Missing the five year holding period. A buyback of shares held for less than five years generally fails section 1035, so the payment is taxed as income.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.